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UK Interest Rates and House Prices - A Quick Update

Graham Watson

3rd November 2022

Ahead of the latest UK base rate decision, this Guardian editorial is aggressively anti-Bank of England, arguing that any decision to significantly raise interest rates tomorrow is not in the interests of ordinary people but rather promotes the interests of big business.

The main thrust of this argument is that if the Bank thinks that rising prices need to be curbed, it shouldn't be at the expense of workers' pay, not least at a time when public spending is again going to be be cut, but at the expense of firms' profit margins - because the needs of their shareholders shouldn't be prioritzed over those of all other stakeholders.

The Bank of England makes it latest interest rate decision today - and the markets have priced in a 0.75% increase in the base rate to 3%. Remember, not that long ago it was 0.5%. This is ostensibly to tackle inflation, but it's controversial nonetheless.

The reason is that the UK is on the point of entering a recession, and it seems counter-intuitive for a government to be tightening monetary and fiscal policy at a time when aggregate demand is falling away. At least that's the point that economists like David Blanchflower have been trying to make. Will an increase in interest rates be the right decision? Only time will tell...

House Prices

Here is a primer from the BBC, looking at the implications of a fall in house prices for the UK. In the short-term, higher interest rates mean higher interest repayments for some, and hence lower consumer spending. However, it will also have an effect on consumer wealth and consumer confidence.

The big issue is so-called negative equity, which is highlighted in the article - and work out what it means and why it is so problematic for households.

Graham Watson

Graham Watson has taught Economics for over twenty years. He contributes to tutor2u, reads voraciously and is interested in all aspects of Teaching and Learning.

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